Buffett Sets Fresh Goal as Berkshire Misses Five-Year Target

Berkshire Hathaway Inc. Chairman Warren Buffett highlights the comparison with the S&P 500 as a way for shareholders to evaluate his performance against a low-cost fund that tracks the index. Photographer: Scott Eells/Bloomberg

March 2 (Bloomberg) -- Warren Buffett said his performance
at Berkshire Hathaway Inc. should be measured over the course of
stock market cycles after missing a five-year target for the
first time.

Berkshire’s net worth failed to rise as much as the
Standard & Poor’s 500 Index from the end of 2008 through 2013,
the company’s annual report showed yesterday. It was the only
five-year period that happened since Buffett took control in
1965. Still, the billionaire Berkshire chairman and chief
executive officer said he can beat the index over equity market
cycles, like he did in the six-year period that ended Dec. 31.

“Through full cycles in future years, we expect to do that
again,” Buffett wrote in the report. “If we fail to do so, we
will not have earned our pay.”

Buffett, 83, has criticized other companies for altering
how they evaluate performance when such changes make managers
look better. Even as he predicted that Omaha, Nebraska-based
Berkshire would fall short of its goal last year, he wrote that
he wouldn’t “change yardsticks.” The billionaire has often
said his focus is on long-term results and that he will do best
against the index when equities slump.

Book value, the measure of assets minus liabilities that
Buffett highlights, rose to $134,973 a share at the end of
December, 91 percent more than where it stood five years
earlier. The S&P 500 returned about 128 percent during that
period, including dividends, as stocks rallied from their
financial crisis lows. The Berkshire number is an after-tax
figure, while the index results are before taxes.

Record Profit

“He moved the goal post a little bit,” said David Rolfe,
chief investment officer of Berkshire shareholder Wedgewood
Partners Inc., which manages about $7 billion. “For those that
focus in on that, it may be disconcerting. Quite frankly, we
never gave it much thought.”

Apart from missing the five-year goal, Buffett said
operations performed well in 2013. Berkshire reported that
fourth-quarter net income rose 9.6 percent to $4.99 billion,
while annual profit jumped to a record $19.5 billion on higher
earnings at insurance units and railroad Burlington Northern
Santa Fe. Buffett’s cash hoard climbed to $48.2 billion as of
Dec. 31 from $47 billion a year earlier.

The number of employees increased by more than 42,000 to
330,745 at the end of 2013. That includes about 29,000 at HJ
Heinz Co., the food company that Berkshire bought last year with
Jorge Paulo Lemann’s 3G Capital.

Buffett said the Heinz deal could be a template for large
acquisitions. Berkshire provided more than $12 billion to help
finance the deal, while 3G oversees operations. He wrote that
he’s prepared to take a larger stake in Heinz if some 3G
investors seek to sell their shares in the ketchup maker.

Energy Deals

Berkshire is also seeking more acquisitions at its
MidAmerican unit after buying NV Energy last year for $5.6
billion to expand in Nevada. The utility business provides
attractive ways to deploy capital and is less vulnerable than
other industries in recessions, Buffett said.

“He’s taking the money and reinvesting it in a smart
way,” said David Sims, co-manager of the Eagle Capital Growth
Fund, which holds Berkshire shares. “It’s difficult for any
investors to be unhappy with that.”

Buffett’s long-term track record is among the best in
investing and responsible for making many of his early backers
wealthy. Book value stood at $19 a share when he took over and
had compounded at almost 20 percent annually through 2013. That
compares with 9.8 percent for the benchmark.

Takeovers, Stocks

Missing the goal in the last five-year period highlights
how difficult Buffett’s task has gotten with his company’s
expansion. Takeovers and stock picks have built Berkshire into a
business with dozens of operating units and equity investments
valued at more than $115 billion. That means future gains have
to be bigger in absolute terms to increase book value by the
percentage amounts of years past.

Buffett highlights the comparison with the S&P 500 as a way
for shareholders to evaluate his performance against a low-cost
fund that tracks the index. He has said that book value per
share understates his company’s true or intrinsic value, which
relies on some subjective analysis.

On an annual basis, Berkshire has failed to beat the index
only 10 times during his tenure, and nine of those occurred when
the S&P 500’s annual gain exceeded 15 percent, Buffett wrote in
yesterday’s report. The index returned 32 percent last year.

Intrinsic Value

“I believe both Berkshire’s book value and intrinsic value
will outperform the S&P in years when the market is down or
moderately up,” he wrote. “We expect to fall short, though, in
years when the market is strong -- as we did in 2013.”

Buffett’s homespun wisdom and investing success has made
his letter a must-read on Wall Street. The billionaire strives
to make the document readable and counts on his friend, Fortune
magazine’s Carol Loomis, to help edit the remarks. He has said
he writes for people like his sisters, who have a lot of their
money invested in the company and don’t work in finance.

The CEO uses the letter to highlight annual results at
Berkshire, applaud the work of managers at its business units
and opine on corporate governance and the economy. This year, he
warned about state and local governments’ obligations tied to
employee retirement benefits.

“Citizens and public officials typically under-appreciated
the gigantic financial tapeworm that was born when promises were
made,” he wrote. “Unfortunately, pension mathematics today
remain a mystery to most Americans.”

Energy Future

Buffett often cites his own blunders in letters, as he did
this year when lamenting an investment years ago of about $2
billion in Energy Future Holdings Corp. bonds. Berkshire sold
its holdings in 2013 for $259 million and suffered a pretax loss
of $873 million after accounting for interest payments, he said.

Allan Koenig, a spokesman for Dallas-based Energy Future,
declined to comment on the company’s financial prospects or
Buffett’s investing decisions.

“We are extremely proud of our operational record,”
Koenig said in an e-mail. Energy Future has shown “stellar
performance through a range of challenging market conditions.”

At this year’s annual meeting, Jay Gelb of Barclays Plc
will be the insurance analyst asking questions of Buffett,
according to the letter. He’ll join Ruane Cunniff & Goldfarb’s
Jonathan Brandt, who was also on a panel at last year’s
gathering, asking about other industries. Buffett is seeking to
fill out the group with an investor who is betting on a decline
in Berkshire’s shares, a role filled last year by Douglas Kass.

Three journalists are returning for a separate panel. They
are Loomis, Becky Quick of CNBC and Andrew Ross Sorkin of the
New York Times.